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Friday, March 30, 2018

Santiago Levy, an economist who served in several capacities in the Mexican government, has a really interesting post at the Brookings Institution site about education and economic growth in Mexico. We would logically expect a more educated workforce to generate more growth but we don't see that in Mexico (and likely not in other Latin American countries as well).

The answer is informality.

The co-existence of heterogeneous firms in the same narrowly-defined market is one manifestation of widespread resource misallocation in Mexico. If somehow the hundreds of self-employed truck drivers could be grouped in a firm, the productivity of the transportation sector would increase and, critically, so would the demand for more educated workers.

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Many developing countries in Latin America have numerous small low productivity firms and many self-employed workers. In other words, they have large informal sectors and misallocation is a significant issue. While the specific factors that generate misallocation probably differ between countries, in each economy the phenomenon drives two undesirable outcomes: low productivity and depressed demand for more educated workers.

In Mexico there is a huge gap between the most productive and least productive firms. The most productive have educated workers doing accounting, engineering, web design, or whatever. The least productive are just one or a few people doing it on their own on a shoestring. They are not hiring educated workers.

In short, informality is a drag on economic growth, employment, and wages. And it remains widespread.